The proposed site for Meta Platforms Inc.’s data center outside Talavera de la Reina, Spain, in July 2023.
Paul Hanna | Bloomberg | Getty Images
Citi said real estate companies around the world are currently focusing on one area: data centers.
“One of the compelling emerging themes in global real estate is the expansion of industrial and diversified companies into data centers,” Citi said.
“Higher potential returns from data center development are generating strong interest from global real estate companies to explore and expand their data center footprints,” the bank added in a June 17 report.
Citi noted that major themes such as artificial intelligence and nearshoring are driving data center growth.
Data centers hold the vast amounts of computing power required for AI workloads, a need that will grow as many technology companies are rapidly developing AI infrastructure. Large language models require significant data center capacity.
Citi noted that a growing number of industrial companies are looking to convert warehouses into data centers. But the bank said it believed the huge power demands of hyperscale data centers to feed artificial intelligence demands and the limited availability of power transmission were “holding back” supply growth.
“As a result, we expect demand to maintain growth or outpace supply in the coming years, leading to better key performance indicators and growth returns for the data center category,” Citi said.
“We predict that the development and construction of hyperscale data center capacity will grow significantly over the next seven years, spurring interest from various industrial and diversified players around the world,” the report states. It also predicts that demand for data center power will take a compounded form. By 2030, the annual growth rate will remain in the teens.
“We would not be surprised if some industrial companies work more directly with existing data center vendors and platforms, entering their supply chains and creating win-wins, redeveloping warehouses and entering the hyperscale data center market,” it added.
Individual stocks benefited
The bank named three “direct beneficiaries” of growing demand for data centers: U.S.-listed real estate investment trusts Digital Real Estate Trustdata center company Equinics and listed in Australia next DC.
Digital Realty said half of its bookings in the first quarter “may be related to some form of AI workload,” and about half of its sales pipeline also came from anticipated AI workloads, according to Citi.
The company added: “We believe Digital Realty’s data center bookings are likely to continue to rise, and based on our top-down industry outlook and considering the share that DLR can capture, its data center bookings may exceed ours. Expected. “Digital Realty has the opportunity to achieve strong bookings and favorable pricing, resulting in better returns on capital. “
As for Equinix, Citi said it provides a “hub of value” for clients to connect to a range of clouds and generate artificial intelligence services. There’s also an Nvidia spin-off here, with Equinix providing “fully managed services” for Nvidia AI, Citi said.
“We believe growth prospects appear undervalued at current prices,” the bank said.
Other “diversification” beneficiaries – including those converting their warehouse assets – include Singapore-listed companies Keppel Data Center REITand Mapletree Industrial Trustand CapitaLand India TrustAccording to Citibank.
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